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sold, total costs (Subramanian and Weidenmier, 2003) and operating costs (Calleja,
Steliaros, and Thomas, 2006).
Besides the U.S., cost stickiness is also documented in other countries such as UK,
French, German firms (Calleja et al., 2006) and Japan (Yasukata and Kajiwara, 2011).
Some researchers look for the evidences of sticky costs across industry levels. For
example, Subramanian and Weidenmier (2003) show that manufacturing is the “stickiest”
industry because of high level of fixed asset and inventory, while merchandising is the
“least sticky” due to its highly competitive environment. Financial service and service
industries do show some level of stickiness where interest expenses drive stickiness in the
financial industry, whereas employee and inventory intensity drive stickiness in the
service industry. In addition, merchandise and service firms adjust their cost quickly in
response to change in sales revenue due to their lower level of fixed asset and the use of
temporary employees. Balakrishnan and Gruca (2008) investigate inter-departmental
variation in cost stickiness of a hospital and find that costs are sticker in services deemed
more central to the hospital’s mission. They argue that hospital administrators are
unwilling to trim costs in core activities because of the nature of hospital’s service and
because of the adjustment costs associated with changing this capacity. In sum, cost
stickiness is a phenomenon that is widely spread across country-level, industry-level as
well as department level.
2.1.1 Explanations and Consequences for Cost Stickiness
Some studies on cost stickiness investigate the factors associated with the degree of
cost stickiness, overall, including (1) economic explanations: a. the magnitude of
adjustment costs, b. managerial expected future demand, c. current unutilized capacity
carried from prior periods; (2) agency explanations: a. incentives to build empires, b.
incentives to meet earnings targets; and (3) behavioral explanations.
2.1.1.1 Economic Explanations
Based on the theory that cost stickiness reflects the deliberate resource commitment
decision of managers when facing uncertainty on future demands in the presence of
adjustment costs (Anderson et al., 2003; Anderson, Banker, Huang, and Janakiraman,
2007), Anderson et al. (2003) find that when asset intensity and employee intensity are
higher, the degree of cost stickiness increases since the adjustment costs tend to be higher
for firm that rely more on asset owned and people employed than materials and services
purchased by company. Likewise, Balakrishnan, Labro, and Soderstrom (2014) show that
the asymmetric behavior of costs is conditional on the proportion of fixed costs over the
total costs, where the fixed costs cannot be adjusted quickly enough in response to